家樂氏 (K) 2005 Q1 法說會逐字稿

Good morning.

Welcome to the Kellogg Company 2005 first quarter earnings call.

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After the speaker's remarks there will be a question and answer period.

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At this time I would like to turn the call over to Simon Burton, Kellogg Company Director of Investor Relations.

Mr. Burton, you may begin your conference.

Thank you, Laurie.

And good morning, everyone.

Thank you for joining us for review of our first quarter results and for some discussion regarding our strategy and outlook.

With me here in Battle Creek are, Jim Jenness, Chairman and CEO;

David MacKay, President and COO;

Jeff Boromisa, CFO; and Gary Pilnick, General Counsel.

By now you should have received a press release by e-mail and the slides that the Company for today's presentation are available on line at www.KelloggCompany.com on the Investor's page.

We must point out that certain statements made today such as projections for Kellogg Company's future performance, including earnings per share, net sales, gross margin brand building, operating profit, innovation, costs, interest expense, tax rate, cash flow, working capital, share repurchases, and debt reduction are forward-looking statements.

Actual results could be materially different from those projected.

For further information concerning these factors -- the factors that could cause these results to differ, please refer to the second slide of this presentation as well as to our public SEC filings.

A replay of today's conference call will be available by phone through Tuesday evening by dailing 888-203-1112 in the U.S. and 719-457-0820 from international locations.

The pass code for both numbers is 2469078.

The call will also be available via webcast which will be archived for 90 days.

Now let me turn it over to Jim Jenness, Chairman and Chief Executive Officer.

Thank you, Simon and good morning, everyone.

It is a sunny day today in Battle Creek.

We are obviously very pleased to report another positive quarter driven by broad-based growth across our businesses.

This performance in the first quarter is even more impressive considering 2004 very difficult comps.

By almost any metric this was another excellent quarter.

We posted much stronger than expected sales growth, reported net sales grew by 7.6% which built on a significant 11% growth last year.

Internal net sales growth, which excludes the impact of foreign exchange, acquisitions, divestitures, and differences in the number of shipping days was 6.3% and built on excellent 6.5% growth in the first quarter of 2004.

Our gross margin expanded by 90 basis points.

We continue to drive price mix which was a significant contributor to the margin expansion.

We managed this despite continued high energy and fuel prices and increased benefit costs.

And as always, we took the margin expansion and invested it back into the business.

We continue to invest in cost reduction projects and we significantly increased investment in brand building during the quarter.

Remember, these two things are simply investment in the future of our company.

In fact, it is because we made this kind of investment in previous quarters that we're able to drive the excellent growth we are reporting today.

Our goal is to generate dependable sustainable growth. 2005 now looks like it will be more front end loaded than we originally anticipated, which should give you added confidence in our ability to meet our targets for the year.

In fact, even the recent significant increases in our estimated up front costs in 2005 to $0.15 a share from the original estimate of approximately $0.05 per share, the first quarter's business momentum gives us confidence that earnings for the full year will now fall at the high end of the previous rage of $2.28 to $2.32 per share.

By any measure, this was an excellent quarter.

Slide 4 details some of the key financial highlights.

Net sales increased by 7.6% as a result of broad-based strength across our markets and some favorable impact from currency translation.

Internal sales growth, which excludes the effect of foreign exchange, was 6.3% and represents significant growth over last year.

Operating profit increased by 11% and internal growth was 10%.

We managed this despite a mid-single digit increase investment in brand building, the significant cost head winds faced by the entire industry, and the absorption of approximately $0.04 of up front costs which was an increase from our initial expectation for less than $0.03 per share.

Earnings per share grew by 15% after increasing by 33% in the first quarter of 2004.

This quarter's performance was also helped by a lower tax rate and slightly lower interest expense.

Cash flow for the quarter was $169 million, which was lower than last year's $211 million, in part, because of the timing of an interest payment.

Jeff will discuss this in more detail in a minute, but remember too, that last year's cash flow growth was also 33%.

Let's look at the results in more detail.

Slide 5 shows our net sales growth in its various components.

Reported net sales was 7.6% in the first quarter driven by broad-based internal growth and a contribution from currency translation as the dollar remains relatively weak against various currencies.

Internal net sales growth was a strong 6.3% and built on growth of 6.5% last year.

This internal growth again came from both price mix improvements and tonnage growth.

In fact, the price mix increase of 2.3% was driven by improvement in mix and price partially as a result of last year's U.S. cereal price increase.

Mixed improvement is an important part of our volume-to-value operating principle and we are encouraged by the strong results.

In addition, tonnage increased by 4%.

The growth we saw earlier in the quarter continued in March and was broad-based across our businesses.

Slide 6 details our investment in brand building for the first quarter of 2005 and the full year 2004.

Our strategy is to increase investment in brand building at a rate greater than sales growths.

As you can see, we achieve this in 2004 and posted a double digit increase in investment.

But we didn't quite meet our target during the first quarter of 2005 due to the better than expected sales growth and the timing of certain projects.

Our expectation is that we'll meet this goal for the full year.

We are often asked how long we can continue to increase our investment in brand building at such a strong rate.

We are a branded food company and investment through innovation and brand building is our life blood.

Product news and promotion, such as the Special K Two-Week Challenge, are an essential part of the way we operate our business.

Consequently, we are committed to continuing this investment in our brands and driving future growth and we still have a long way to go.

Also, keep in mind that our definition of brand building does not include trade promotion, just advertising and consumer promotion.

In a moment, David will review each of our businesses in more detail, but first, let me turn it over to Jeff Boromisa, who will walk you through our financial results.

Thanks, Jim.

Good morning, everyone.

The sales growth Jim discussed, and the continued effect of buying to value, drove our gross profit margin for the first quarter as is shown in slide 7.

In fact, our gross margin improved by 90 basis points which is higher than our long-term target.

The improvement in price mix that Jim mentioned earlier, along with the productivity savings from previous cost initiatives and operating leverage, offset various negative factors such as higher fuel, energy, and benefit costs.

In addition, we invested a total of $0.04 in up-front costs, all of which was recognized in costs-to-goods sold.

We expect that the incremental full year effect of higher benefit costs will be up to $0.10 per share, and that commodity costs will neither benefit or hurt us.

As you know, some commodity costs are lower this year than last, but others, such as energy, are much higher for us.

In addition, we have hedged many of our input costs for this year.

Lower costs per package inserts accounted for less than half of the gross margin expansion.

Remember that these consumer promotions account for -- are accounted for in our costs-to-goods sold.

Our long-term target is for a gross margins expansion to equal approximately 50 basis points a year and 2005 is off to a great start.

We expect a continued mix improvement, operating leverage, and productivity savings will more than offset continued negative cost pressures.

Now, let's turn to the operating profit growth by business.

Slide 8 detail this is growth by each of our geographic reporting areas in the first quarter and as always, internal growth excludes the benefit of currency translation.

As you can see, our broad -- broad-based growth also extended to operating profit as each of our segments posted strong growth.

In North America, internal operating profit growth was 11.6%.

We are pleased with this growth given our investment during the quarter.

In addition, all of the quarter's up front costs were recognized in North America and are reflected in our operating profit results.

Internal profit results was 9.2% in Europe where we also increased brand building investment at a double digit rate.

We increased our investment in brand building at a double digit rate in Latin America and saw internal operating profit growth of 4.8%.

And in Asia Pacific where internal operating profit growth was 9, we also increased brand building investment at a double digit rate.

So you can see that each of the reporting areas contributed to this quarter's growth and our investment in the business just adds to the quality of these results.

Net earnings were helped by a lower tax rate of approximately 32% and slightly lower year-over-year interest expense due to our continued focus on the manage for cash principle.

These benefits partially offset by an asset writedown and a charitable contribution, these items totaled approximately $0.02 per share.

We continue to expect that the full year tax rate will be approximately 33% and that the total interest expense for the full year will be only slightly lower than last year due to the timing of bond maturities.

Slide 9 shows our continued improvement and working capital management.

This is core working capital measured as receivables plus inventories.

Less traditional payables which excludes customer trade liabilities divided by our last 12 months sales, this is our 15th quarter of improvement and core working capital and we are very proud to be the industry leader in this metric.

As you know, this improvement has been a good source of cash for us over the last couple of years, and we are very pleased to have achieved this result while improving our levels of customer service.

In the future, we expect additional improvement and core working capital as percentage of sales.

But expect it to be neither a source of or use of cash.

Slide 10 shows our cash flow performance for the first quarter.

This was a decrease of 20% on last year's very strong $211 million performance.

This was due to the timing of an interest payment of $112 million during this quarter.

The comparable payment fell on the second quarter of last year.

Remember also that last year's result represented 33% growth from 2003.

This year's cash flow was driven by strong earnings and continued discipline with capital expenditures.

This was a good start to the year and gives us confidence that we will achieve our full year cash flow target of between 950 million and 1,025,000,000.

Slide 11 show it is reduction of debt since the acquisition of Keebler.

Our long-term target is to reduce debt by approximately $300 million a year.

As you know, our Board of Directors has approved a $400 million share repurchase authorization for 2005, and we already completed $260 million of this amount during the first quarter.

Now, let's look at slide 12 and the progress we made with return on invested capital in recent years.

Our operating principles ensure that we maintain capital discipline while focusing on return.

We understand the importance of improving our return and are confident that we will continue to do so over time.

Finally, let me discuss our outlook for the remainder of 2005, which is detailed on slide 13.

As you can see, the strength of the first quarter results gives us confidence that we will now reach the high end of our previous earnings guidance range of $2.28 to $2.32 per share.

While we are very pleased that we achieved such strong results in the first quarter, it wouldn't be prudent for us to expect that we would maintain that level of growth.

So we continue to expect internal sales growth more in line with our long-term target of a low single digit rate.

As we said in the March press release, the plan closure of two snacks bakeries will bring up front costs for the full year to approximately $0.15 per share.

This is an increase from our previous guidance for $0.08 to $0.10 per share and our original estimate of $0.05 per share.

Essentially all of these costs will be recognized in North America and are in costs-to-goods sold.

Timing is often hard to predict, but we expect the distribution to be relatively uniform across the quarters.

As I mentioned earlier, we expect an increase in benefit costs up to $0.10 per share or $60 million higher than in 2004.

This is primarily due to 3 reasons.

The first being significant health care cost inflation.

The second is a reduction about the assumed rate of return on major plan assets from 9.3% in 2004 to 8.9% in 2005.

And the third is the decrease in the weighted average discount rate used to measure obligations at year-end 2004.

Finally, remember that we have one less week in 2005 than we had in 2004.

That extra week added slightly more than 1% to sales last year.

So our high single digit earnings growth remains a realistic target.

And with that, let me turn it over to David for review of our operations.

Thanks, Jim.

Let's take a look at our results by business segment.

In slide 14 shows the strong internal growth posted by our North American business during the first quarter.

As you can see, growth was broad-based across cereal, snacks and frozen and specialty channels.

Growth of 7% in Q1 builds on strong growth of 5% in the first quarter of 2004.

Let's review in more detail our North American cereal business, and if you'll turn to slide 15, internal cereal net sales growth was 4% for the quarter, which built on a difficult comp of 4% last year.

Some of the strengths was due to price realization and the timing of our innovation program.

As most of you know, the majority of our recent innovation in U.S. cereal was introduced early in the first quarter.

We benefited from the sales and you can now start to see the effect of these introductions in recent measured channel data.

In fact, measured channel data through the end of the quarter shows that we're regaining much of the share losses that we saw at the end of the year.

And more recent data shows even more improvement.

Volume-to-value drives our continued commitment to innovation and we did an excellent job getting these new products to consumers.

Our speed to market increased substantially from the same four week performance last year, and last year's performance was excellent.

Once again we saw strong growth in the U.S.

We introduced Tiger Power, Vanilla-Cream Mini-Wheats, Mini Swirlz, Smart Start Healthy Heart, and the launch of Kashi's hot cereal has been very successful and we're happy with the initial results and our innovation expertise continues to pay big dividends.

When we calculated the difference between our sales growth and the publicly available data for the quarter we found what you might expect.

The majority of the difference, which was roughly 5% was attributable to the effect of styles in nonmeasured channels.

The remainder of the difference was divided between the effect of both the timing of both the Easter holiday and the introduction of new products.

It is important to note that our retail inventory levels remain well within our average range.

As for the whole Company, North American cereal posted good increases and price mix and in North America, it was principally driven by price.

And you'll remember we said at the time of our price increase last summer, that we expected little benefit until 2005.

Slide 16 highlights consumer promotions and North American innovation planned for the second quarter.

As Jim said earlier, we are first and foremost a brand of food company, an effective brand building programs and innovation are essential to our continued success.

As you can see, we have some exciting new products planned for introduction, including a new fruit and yogurt variety of Special K. Toasted Honey Crunch, Cran- vanilla Crunch and various new varieties of snacks.

That innovation and some excellent new advertising and brand building programs, make us optimistic that our business can meet its targets for the remainder of the year.

We have the Star Wars theme promotion planned for the second quarter and 33 of our businesses have scheduled to participate.

And while these programs aren't the largest part of our business, they are important to us, and we believe that we can provide the levels of execution and geographic reach, that few other companies can equal.

If you'll now turn to slide 17, we'll look at the continued growth of our snacks business.

After very strong results in each of the quarters last year, we're pleased with this quarter's 7% internal sales growth.

A continued focus on new product introductions, good new advertising campaigns, and excellent DSD execution made this possible in categories that remain difficult.

In fact, each of our business segments in snacks, cookies, crackers, wholesome snacks, and toaster pastries posted net sales growth in the quarter as you can see on slide 18.

During the quarter we posted mid single digit sales growth in crackers and wholesome snacks.

Low single digit growth in cookies and double digit growth in toaster pastries.

Excellent growth from Pop Tarts in the first quarter was a gain driven by strong innovation as we introduced both Cinnamon Roll and Caramel-Chocolate varieties.

And we have a new Strawberry Milkshake variety planned for introduction during the second quarter.

Growth in the crackers business was driven by the excellent execution of the Super Bowl and March Madness programs, and by both innovation and brand building.

We introduced new Cheez-It Gripz in single serve multipacks and Club Snack Sticks in two varieties.

And while it's still early, these introductions appear to be strongly incremental.

We also introduced a new Cool Ranch flavor of Cheez-It Twisterz, and we have new Twisterz and Club Sticks advertising out as well.

While the cookie category remains challenging, we again saw strength where we invested in DSD.

Chips Deluxe had a good quarter driven by the Robots tie-in, and the brand will also be included in the Star Wars promotion in the second quarter.

Sandies posted growth particularly as a result of the success of the new Lemon and White Raspberry innovation and the Sponge Bob themed Animal Crackers continued their recent strong growth.

In addition, the new Keebler Equity ads that we showed you at CAGNY, are on air now and are being very well received although it's still too early to read any end market response.

Wholesome snacks did well as a result of the growth in both Nutri-Grain business and strength in Rice Crispies Treats.

And we also saw continued growth from Special K Bars and All-Bran Bars.

In addition, our Fruit Snacks business continued its strong performance and built on its number 2 position in the category.

We announced a couple of weeks ago that we had purchased production capacity from Kraft and that we also negotiated the Fruit Snacks license with Nickelodeon.

This will allow us to bring our production in-house and will help support future growth.

In addition we have other innovations, and brand building programs planned for Q2.

New Fudge Shoppe filled cookies are scheduled for introduction, as are our White Fudge Striped variety and a new Soft Batch Oatmeal Cookie.

We're also planning new packaging innovation on Nutri-Grain.

We're also very excited about the introduction of four SKUs of Right Bites.

Single serve 100 calorie packs which combine great tasting food and portion control.

So we're pleased with our retail snacks performance so far in 2005, and continue to expect that we'll meet our full year targets with this business.

Slide 19 shows the results for our North American frozen and specialty channels product group.

Internal net sales in the first quarter increased by an impressive 12% on top of 4% growth in the first quarter over the last two years.

Eggo posted strong double digit sales growth on continued good performance from the base waffle business as a result of good innovation, retail execution, and excellent brand building programs.

The early results from the new Eggo Toaster Swirlz are also encouraging and added to this quarter's excellent results.

We also have new products planned for the Eggo brand including new pancakes and a Flip-Flop Waffle which is half vanilla and half chocolate flavored.

Both of the introductions are planned for the second quarter.

Our Morningstar Farms vegi-food business posted solid single digit sales growth as a result of new products and solid marketing programs.

And the recent consolidation of capacity from two plants into our Zanesville plant went very smoothly during the quarter.

The specialty channel business also had a strong quarter posting high single digit sales growth driven by a number of new initiatives.

Our convenience and drugstore business continued its strong momentum from 2004 with growth in cereal, Pop Tarts, Rice Crispy Treats and our new $0.99 snack line.

Turning now to slide 20 and Kellogg International.

Reported sales growth was 8% in the quarter and even internal growth which excludes favorable effect of foreign currency translation was 5%.

This growth was made more impressive by the excellent results posted in the first quarter of last year when we grew internal sales by a strong 10%.

Importantly, each of our geographic areas added to this growth.

Let's take a look at the results by area.

In slide 21 shows the internal net sales growth posted by each of our major international areas in the first quarter.

And each of these areas and most of our core markets within these areas posted solid internal sales growth.

Europe posted internal sales growth of 3% on top of a very strong 7% growth in the first quarter of 2004, this was driven by strengths in both cereal and snacks.

The UK, Europe's largest business, posted low single digit growth which built on double digit growth last year.

We launched new varieties of Crunchy Nut and Coco Puffs in the quarter and also saw a very strong growth in both Special K and All-Bran as a result of strong marketing programs.

We also introduced various new products in other countries in Europe including Special K Yogurt in Spain, All-Bran Flakes with Yogurt in Italy, and new varieties of Coco Puffs in France, Spain and Italy.

While parts of Europe remain a challenging environment due to hard discounters, we're very pleased to see continued innovation and brand building generating growth on tough comps.

In addition, we have a lot more activity planned in the second quarter, including a significant amount of innovation and brand building activities across the business.

Latin America delivered double digit internal sales growth as a result of strength in both cereal and snacks.

In Mexico cereal performance was driven by strong brand building investment, innovation and strong consumer promotions including a Special K pedometer.

All-Bran, Choco Crispies, and Extra, all posted strong growth as a result of good brand building initiatives.

And we introduced a new All-Bran cereal with flaxseed at the end of the quarter.

We're following this in the second quarter with an All-Bran Bar also containing flaxseed.

In addition, we saw strong growth in the category in Venezuela and Brazil and we also gained share in those countries.

We also have a lot of activity planned for Latin America in the second quarter including participation in the global the Star Wars promotion and other activities and innovations.

Asia reported internal sales growth driven primarily by strong results in Japan.

Growth in this region was also driven by both brand building activities and innovation.

All-Bran and Bran Flakes continued the momentum and we introduced the Fruit 'n' Flakes brand in the first quarter which also contributed to our growth.

We continued to see weakness in Korea although we saw excellent growth in the smaller Indian markets.

And in Australia, we also posted sales growth in both cereal and snacks.

We ran health oriented ads for All-Bran and our Guardian brand and both posted strong growth as did Sultana brand.

And Special K in Australia also did well as a result of the January Two-Week Challenge event and good innovation.

As we continue to deliver reliable and dependable results, all the Kellogg managers around the world recognize the need and challenge in continuing to improve in all that we do.

We realize that the focus on innovation, brand building and executional excellence must be maintained and, if possible, increased.

We'll continue to challenge ourselves to maintain our growth into the future and now I'll turn it back to Jim.

In summary, our Company and each of our businesses had a strong quarter.

We saw strong sales momentum across the business.

This was broad-based growth driven by our relentless focus on our strategy to grow cereal, expand snacks and pursue selected growth opportunities, as well as to drive superior execution via our volume to value and manage for cash operating principles.

Importantly, this momentum gives us added confidence that we can achieve our goals in 2005.

We saw good price and mix improvement, which led to increased margin despite continued strong cost head winds.

And we're able to capitalize on both of these things and dramatically increase our investment in the business.

We are not interested in one or two quarters of extraordinary growth followed by a period of underperformance.

Our approach continues to be to do all we can to generate dependable, sustainable growth into the future.

Importantly, the way we will achieve these results hasn't changed either and our employees continue to execute our strategy day-to-day.

And it is this focus that gives us confidence that our full year earnings will be at the high end of our previous range and that enables us to raise our dividend by 10% beginning in the third quarter.

These are both signs of our increased confidence and the sustainability of our strategy and operating principles.

And with that I'd like to open it up for questions.

Thank you sir.

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We will take our first question today from Chris Growe, A.G. Edwards.

HI, good morning.

Nice quarter.

I had a couple of questions for you.

I guess just generally in U.S. cereal.

There's been a lot of discussion about this category and there's thoughts that General Mills may get a little more promotional here upcoming and, of course, private label continues to gain market share.

I wonder if you could just make some general comments.

You had a very strong quarter in -- in your cereal business and, obviously, contrary to what IRI said but should we expect that sort of trend to continue with the strong new products in the increased brand building?

Chris, this is Jim.

You know, we're not in the business of commenting on what our competitors are doing, but I can say that for the -- you know, for the category -- first of all, one, the category in terms of overall performance is firming up in terms of just overall performance.

I think you're right on the money in terms of the importance of innovation and effective promotion are really the keys that -- that are going to drive our business.

That's clearly what we're focused on.

You know, we can see in terms of pricing, you know, our base pricing is up and I'm sure you can see what's happening with the competitors in that.

As we said, that's a reflection of the price increase from last year starting to come through.

Promotive prices are also up and we see that that as good signs.

So our focus is going to fundamental and that is effective innovation, strong and effective advertising, and outstanding promotion with superior execution.

So given the positive pricing environment, even given the competitive challenges you feel pretty comfortable that, roughly, this sort of growth rate could continue for the year.

Is that reasonable?

We've given our guidance for the year and where we think it's going to be, this is very positive performance.

And given the categories we're in to really project this -- we're confident about delivering our targets and we'll see what the future can bring us.

Okay.

You mentioned in the press release an increase in a level of investment that you plan to make behind your business.

Does that include a comment -- does that comment include the upfront costs?

Is that what you were referring to as well as the brand building?

Well, at the end of the day it includes both.

Yeah, Chris, this is Jeff.

Yeah, absolutely.

It -- you know, brand building has a lot of focus with us.

It's very important for us.

That will continue to go up as an avenue for us to reinvest even more and of course the -- you know, the announcements that we made about the plant closures, that's in the $0.15 of upfront costs that we disclosed.

You mentioned all the regions other than North America where brand building was in double digits, did that imply that North America was flattish down this quarter; is that reasonable?

Brand building in North America was up, it just wasn't up at the high double digit that we were looking for.

And that's principally timing and nothing else, Chris.

For the full year you'll find that across all of the regions we'll -- we'll be where we expect to be and North America will be no different.

You know, the other fact, Chris, -- this is Jeff -- is that the operating profit growth in North America still was close to 12%.

They took all the charges for the upfront cost and delivered that with their brand building being up.

That's a good point.

Thank you.

Next we will hear from Judy Hong with Goldman Sachs.

Good morning, everyone.

Good morning.

David, I was wondering if you have the consumer take-away numbers for the North America snack business.

You know, similar to cereals there seems to be a disconnect between IRI data and what you're posting on the shipment base.

I'm just wondering if you can give us some perspective of what's happening at the consumer take-away level for the snack business.

I think they cross all of our businesses when you're comparing IRI with what we're telling you we do on a shipment base, the biggest difference is the nonmeasured channels and I think that's going to be an ongoing issue for you as you try and forecast where our business is at and that -- as I said in cereal, that was the bulk of the difference and it was a pretty big difference.

And if you look at crackers, true there too.

If you look at cookies, the only thing in cookies was, I think, K-Mart is still in the IRI data, and we've actually moved that within our own mix to DSDD which is recorded separately.

We're still very close as we look and reconcile all of them and it comes back to principally nonmeasured channels.

Okay.

And then if you just think more strategically and look at the broader snack category, and -- you know, many of your competitors are talking about going after the same share of -- of the snacking per se, how -- how do you see your role in broader snack category and how do you manage through, you know, some of the more, I guess, tightened competitive activity in order to continue to expand your growth in the snack category?

Yeah, I think what you're seeing in snacks is a lot of people coming from related categories and trying to move into other parts of the snack category and I think that's really a reflection of people striving for growth as we all are.

Who knows how successful that will be.

It's been tried for many years.

It's more difficult to enter a category that you're not in from an adjacent category than most of us believe.

And we've found that out ourselves over time.

Our real focus is just sticking on our strategy, focusing on our core brands, trying to bring consumer relevant innovation, making sure we support them with strong advertising and strong consumer promotions.

And I think the snacks category, per se, will be quite competitive.

It was last year.

Low carb was in there last year.

This year you've just got a lot more players trying to eke out some shares.

But we're not going to respond in any other way than we always would.

Focusing on innovation, focusing on band building, and trying to bring to market things that resinate with consumers, and then differentiate it.

Okay.

And then just a quick question for -- for Jeff.

The other expense line where you, I guess, talked about the $0.02 of the charitable contribution and the assets writedown, how much of that was the asset writedown portion?

The asset writedown, Judy, was about 7 million and corporate contributions about 6 million.

Okay.

Thank you.

Thank you.

With Deutsche Bank with we will now hear from Eric Katzman.

Hi.

Good morning, everybody.

Good morning, Eric.

A few questions.

I guess why wouldn't you put the asset writedown in the division or up in cost-to-goods?

Why is that in other expense?

Actually it -- it's a corporate owned asset so it doesn't go into our reporting segment that contained the business unit.

It's more of a center corporate asset that was written down.

Okay.

I'm trying to remember, I don't have my notes in front of me but it seems like your tonnage growth was on a consolidated basis quite strong.

You've had the benefit of increasing capacity utilization and keeping your CapEx down, but I assume if your volume growth, this is not a -- not a -- is a good problem to have, but do you think CapEx is going to have to start moving up if your tonnage growth continues to move up like it has?

Hi, Eric, this is Jim.

Just to your point on the tonnage growth, I just want to make sure everybody has to point that all of our businesses were up in terms of a dollar NSB basis and it's really within that some of the mix so we're not seeing that.

We say it's a problem we don't mind having.

In terms of future capital needs, there will be no doubt at some point we're going to have to do some additional investment to ensure that we can keep the supply going as well as to deliver the kind of innovation so that's a point and you know, we have a goal here of trying to keep that level of spending of around 3% of our -- our net sales.

That area still feels good to us.

We are -- you know, at the core of it, if you step back, we are in an innovation, marketing branded idea business and we are not capital intensive, so while that 3% may edge up a few tenths here or there it's really not the kind of thing that we see a mass of influx.

Okay.

And then Jeff, I guess you said that the Board had authorized 400 million.

You've already done 260 and yet your share count was up significantly versus a year ago and even sequentially wasn't down all that much.

Should -- is there some kind of like share count projection that you would give us given the fact that you've already, you know, repurchased a pretty significant slug of the authorization for the year?

We probably wouldn't disclose that but you're right.

There was a lot of stock option exercises in the first quarter.

That's what caused the share number to go up.

That's why we were fairly active in the share repurchase and typically we like to get off to a good start in the year.

It does help the delusion for the full year.

Okay.

So in terms of the cash flow priority, you know, you raised the dividend 10%.

You're basically offsetting option exercises, and the rest is debt paydown as opposed to a net decline in share repurchase -- in shares out standing?

That's correct.

All right.

Thank you.

Thank you.

David Adleman with Morgan Stanley has your next question.

Good morning, everyone.

Good morning.

First I want to be clear.

The $0.02 asset writedown in the charitable contribution, that's in excess of the $0.04 upfront cost in the quarter.

Am I correct?

Yeah, that's correct.

Okay.

And then secondly, to go back to an earlier question about the dynamics in the U.S. cereal category, can you comment and give us an update on the behavior of Private Label in the marketplace?

Sure, David.

I think Private Label when we were at CAGNY had a strong Q4, grew strongly in Q1.

But I mean really first, let's go back to Kellogg performance we're up 4% in the first quarter behind innovation and brand building.

As we look at Private Label, their base prices in the quarter actually went down and I think must be retailers pushing it, you know, and there were still, as I mentioned at CAGNY, those four accounts I referred to at CAGNY, still made up roughly 50% of the 5 Private Label growth in Q1, and again as we looked at the impact of Private Label on our business, the bulk of the growth is not coming at Kellogg's expense.

I think the IRI data shows about 10% growth in Private Label for the Kellogg knockoff products, that and Private Label grew about 3%.

For all others it grew nearly 14%, so, you know, and I think at CAGNY we also made the point in our expectation is that Private Label will grow quite strongly through the first three quarters and it will start to abate.

There's a natural point at which I think some of our trading partners will get -- the ones at under index will get back to where they want to be.

Those that are pushing it opportunistically, we'll see whether that works or doesn't work and things will start to pan out but we're really focused on driving our business and happy to do the 2 to 4% in what was a tough comp.

And, David, just as a quick follow-up, where are you in the U.S. cereal market in terms of the evolution of your merchandise price points to where they will ultimately be?

Has that been -- you know, are you 60% through, is it completely executed?

Well, if you look at IRI data, you see our base prices were up 2.4%.

And you know, we took a price increase of about 4, 4.5 mid last year.

And our -- our price on promotion was up to 1.

So both base and price on promotion is up.

In the quarter you did see some of the smaller competitors taking the opportunity to rent some quick share, but the good thing for us is we looked at base price growing, price on promotion growing, was that we were the only company to get quality merchandising.

And I think what that says is we're putting together some quality programs that are gaining us great merchandising even our average price on promotion is rising, so I think that is the strongest indication you could get that our trade spend is being deployed very effectively.

Thank you very much.

With Prudential Equity, John McMillin has our next question.

Good morning, everybody.

Good morning.

Just a comment first.

I think to know that project cost number of $0.04, I think that should be in the press release or the slides, particularly since you're talking about total year upfront costs so I just encourage you in the next second quarter release just to kind of quantify that before the conference call, if you could.

It would certainly make my life easier.

And then in the additional $0.02, Jeff, did you -- did you quantify the -- the breakdown between what was the asset writedown and what was the charitable contribution?

Yes.

7 million.

Yeah, John.

This is Jeff.

The asset writedown was about 7 million and the charitable contribution was about 6, but you know, on your first point, John, you know, the reason we don't disclose that putting it right into the press release is that, you know, from our view it's an ongoing expense.

It's just like commodities or benefit increase or brand building.

So fine.

Don't mention the $0.15 for the year.

If you're going to mention one you've got to mention the other.

Well, I think we do on a full year effect, but you know, in our March press release, we did indicate in there that it would be around $0.04 for the quarter.

And you know --

I see your point if you see mine.

And just what was the -- again the 7 million asset writedown?

What was it again?

It's a corporate owned asset.

It's a hard asset, building type that actually is an asset held for sale and marked down to net realized prizable value that we think we'll get.

Great.

And David, I don't know if you answered Judy's question in terms of North American take-away.

You know, you are admitting the timing of Easter and so forth, but in terms of that, if you did plus 7, what do you think the the consumption was?

What particularly part of the business, John?

Cereal or --

Well, I was starting with everything and obviously, you might not have an exact number, but just to what extent that that plus 7 might have been ahead of, you know, consumption.

Yeah.

We went back and looked at our entry levels.

We probably have a better track on cereal than we do on snacks.

And inherently with the DSD system, you know, people can be building displays at the end of the quarter or during the quarter so that's more difficult to truly gauge.

But we don't think our snacks inventories went up and certainly as we look to that our cereal inventory, we're very much in keeping with where we've been historically.

So we don't think it's an inventory build, we think it's principally, as we did the quantification, the nonmeasured channels, and that is the bulk of it.

And I think unfortunately, as you can't to look at our IRI data there's going to be that mismatch John, and we'll keep explaining it but there's not much we can do.

Yeah.

I look at Nielson (ph) and I look at the 12 weeks ending March 19th and I see your dollar share in these measured channels, in cereal, to use cereal, down 60 basis points and I guess, you know, obvious that excludes the -- you know, the Wal-Marts of the world which is a big part, but it does show Kraft starting to fight back and -- and they have knockoffs directly to your products, and I guess can you just kind of comment on, you know, just on share trends.

This is like 65, 70% of your client base that shows you losing share for the quarter.

Yeah.

I think if we had more recent data as we finish the quarter our share was not down as much as the data you're looking at indicates, and the couple weeks we've had since has been positive too.

But if you talk about one of our competitors, if you look at their price promotion, pricing, they're actually down so they're being quite aggressive and, in fact most of the smaller competitors did look like they wanted to rent a bit of share, but you know, that -- that's the short-term tactical move, one which we typically will not respond to because we try to manage our business for the medium to long-term.

And you've done a good job.

Can I just get a quick comment on whole-grain, not so much what Mills is trying to do or what Special K doesn't have, but is that one reason, Jim, maybe the category you see as firming?

Well, John, you know, as we said at CAGNY.

Nutritional news for the category over the years has generally been positive and we were -- we're feeling good about it in terms of the category.

You know, we have -- and maybe you've seen some of our commercials particularly one on Mini Wheats where we've been out, but we have a whole range of whole-grain products including a new Tiger Power that's out there right now.

Underneath it, that could have something to do with, you know, what the category is starting to firm up and if it is that's just fine from our standpoint.

The other thing that's out there now, John, is there is a little bit of -- and to your point about share -- we did have some timing of innovation that came into the -- the first quarter so you can see that and there is quite a bit of innovation coming into the category so that could be another reason along with the whole-grain.

Thanks a lot.

You got it.

Nice to see you, John.

And John Feeney with Wachovia Securities has our next question.

Good morning.

Morning, John.

Just a couple of questions.

I first wanted -- a major Private Label provider in the cookies and crackers space certainly cancelled some promotions and certainly you know, was unable to deliver and kind of was managing down their volumes in the course of the quarter.

Did you feel that -- I mean, nice number in the snacks business, did you feel that in your snacks business in your core kind of Keebler products away from innovations?

And if so, can you give us any update on what that category is looking like right now?

Yeah, well on cookies the category actually year-to-date is doing better than it's done for a while.

It's actually up on the IRI data 1.8% year-to-date through the 20th of March.

I mean, we didn't really notice it.

You know, I think -- I think the category is still somewhat challenged but there is a lot more innovation going into the cookie category.

I think to Jim's point on cereal, just like the cereal category, the cookie category, the cracker category respond to brand innovation and brand building and I think there's more of that going on.

That's really helping what's going on in cookies, the whole notion of portion control is more important as people are watching what they eat.

So we didn't really notice anything that I'm aware of, John, but as we look at our cookie business, we do have some exciting innovation coming up.

The Right Bites portion control calorie packs we think are great tasting food.

So I -- does that answer your question?

Yeah, I -- I think it answers it.

I guess you -- you so you wouldn't say you felt any effect then from decreased Private Label competition.

No.

And just a second kind of financial, you know, question.

You know, this is the first dividend increase in -- you know, in five years it looks like to me and it's a very big one.

And given, you know, a lot of opportunities you guys have and you're already buying back some shares, I guess we've been looking for share repurchase for a long time and you've talked about wanting to try and keep some powder dry.

Why the big dividend increase as opposed to a more flexible way to return cash to shareholders?

John, this is Jim.

Just a little perspective.

We've been paying a dividend since 1925.

It's 80 years.

We know that this is very important to our shareholders, and two pieces we do watch is just how competitive our yield is relative to our peer group and just what the payout ratio is and -- and as you look at that -- those -- those statistics, you'll see that what this move does for us is it does ensure that we're competitive there.

You know, as we run through the presentation and I think Jeff made the point that we've been sticking to our policy of paying down the debt since we leveraged up Keebler so we have developed in the financial flexibility so when you put that all together it just made sense that this is really a smart move -- a smart move for us.

And John, this is Jeff.

You know, we have talked probably the last year or so about a more balanced use of our cash flow between share repurchase, debt reduction, certainly dividends are included in there but our payout ratio, just a few years ago was up in the 80% range and of course now it's down in that 40 to 50% range and Jim is correct.

We look at the payout ratio, we look at the dividend yield.

They're a little bit lower on those two metrics from where we normally like to be so we made an adjustment to the dividend.

It's been five years since we increased the dividend so we felt very good about it.

Okay.

Thanks, guys.

Hey Laurie, if we could take one more set of questions.

Thank you, sir.

Our last question for this day will come from Terry Bivens with Bear Stearns.

Good morning, everyone and under the wire, I guess.

Just in terms of the free cash usage, a couple of quick questions there.

A lot of companies over the years have kind of used the rate of the dividend increase as a proxy for where they think earnings can go.

Is that case with your latest action here?

You know, our guidance has always been at the high single digit range for earnings and of course this dividend increases that ten.

But we have been on the sidelines from a dividend increase for a number of years.

Not connected.

Okay.

I was trying there.

Okay.

Just in terms of the cereal too, it seems from what we're looking at that your new products, I would say the Tiger Power, the Smart Start entry, the Mini-Wheats have done pretty well initially.

Do you have an updated figure for how much market share in total those three have captured?

I know it's early days and it's likely to bleed off but that might be interesting.

And Dave, I think, could get down into the details a little bit of that, John, but I can tell you that the -- the performance -- we're quite happy with the initial performance of these introductions and -- and their build continues.

We've got outstanding initial availability but also the consumer takeaway, particularly the Vanilla-Cream Mini-Wheats is doing extremely well.

We're very happy with that and if you look at in a key as we mentioned during our script anyway, that innovation is really key to a competitor's performance here and I know that during that period here we really dominated the innovation going into the markets.

That's a real key for us.

And, you know, Terry, if you look at them on a forward basis, a couple a share divided over the full products, with Mini-Wheats, Vanilla-Cream actually doing the strongest but all of them are around .3 to a .8.

And as Jim said our innovation first quarter this year versus last year, significantly stronger and contributing more to our business than others.

And I think that's one of the reasons why as we look at even IRI data, our share coming back, our performance was strong in the quarter and we had to keep it going.

Okay.

Very good, thank you.

I just want to thank everyone on the call this morning and we look forward to seeing you.

And thank you everyone.

That does conclude today's conference.

We do thank you for your participation.

On behalf of the Kellogg Company, everyone have a great day.